Vaughn Palmer: B.C.’s LNG clock ticks as price in Asia plunges

B.C.’s point man on natural gas development sticks to “glass half-full” outlook

A model of the proposed LNG Canada liquefied natural gas plant and marine terminal is shown with the Rio Tinto Alcan smelter in the background, at the company's offices in Kitimat. The joint venture is one of several still at the proposal stage.

Photograph by: Robin Rowland
, THE CANADIAN PRESS

VICTORIA — While Premier Christy Clark touts the promise of a new industry based on the export of liquefied natural gas, news reports continue to raise doubts about her ability to deliver on the multi-billion-dollar results.

“A sharp fall in European and Asian gas prices this year will put liquefied natural gas export projects worldwide under heavy cost pressure, and even kill some off, as expected returns on investments have to be revised down along with prices,” said a Reuters report out of the United Kingdom last week.

The Wall Street Journal reached much the same conclusion in a story out of New York.

“The price of liquefied natural gas in Asia has plunged by nearly half over the past five months, to the lowest level in more than three years. Analysts say that if the price stays at current levels, Asian buyers may be less willing to commit to buying gas from planned billion-dollar export projects in the U.S., Canada and Australia.”

Granted, multi-billion-dollar investments don’t turn on short-term markets alone. “LNG buyers in Japan and South Korea typically make most of their purchases, accounting for around 80% of their needs, through long-term contracts at fixed prices,” reported the Journal. “The remaining 20% is bought in the spot market, where prices fluctuate.”

Still, as Reuters noted, quoting a project director for Royal Dutch Shell, LNG terminals “are extremely price-sensitive because the margins are so thin ... and only a small fraction of them will get built.”

With several projects being put on hold for every one that goes ahead, it matters who goes first — a point underscored last week by a study out of the University of Calgary.

“Competitors may take the cake if B.C. is late to Asia’s LNG party,” was the headline on a summary of the report by my colleague Gordon Hoekstra Friday.

The report did not dispute the need for B.C. to develop alternatives to the slumping market for natural gas in the U.S. Nor did the half-dozen authors from the university’s public policy school discount B.C. as a major exporter of LNG in the long run.

They did raise concerns about the province coming late to the game.

“Producers around the world — including in the newly gas-rich U.S. — are racing to lock up market share in the Asia-Pacific region, in many cases much more aggressively than Canada,” they wrote. “There are more proposed LNG-export projects around the world than will be required to meet projected demand for the foreseeable future.”

With B.C. behind schedule — the premier’s promise to have the first terminal up and running by 2015 has already dissipated — the province risks missing the window of opportunity altogether in this investment round.

“LNG projects are feasible only on the basis of long-term contracts,” said the report. “Once a piece of market share is acquired, it could be decades before it becomes available again.”

Turning to the reasons for the holdup, the Albertans cited “the lack of policy and regulatory co-ordination, with disagreements between governments over standards, process and compensation for those stakeholders involved in the potential LNG industry. Issues as basic as taxing and royalty charges for gas shipments between provinces, and locating facilities and marine-safety standards, remain unsettled in Canada.”

The report also faulted “plans to levy special taxes on LNG, a policy that could render many current proposals uncompetitive.” The latter accusation marks the second time a representative of the public policy school has taken a shot on that score. In a piece published in the National Post earlier this year, the school’s Jack Mintz (who is also, as he noted in the article, a director of Imperial Oil) suggested that the special LNG tax could “destroy the goose that lays the golden egg.”

Another uncertainty was added to the mix on LNG by the recent recognition of aboriginal title by the Supreme Court of Canada, according to one of Premier Christy Clark’s supporters in the business community.

“The decision exceeded the worst-case scenario of both governments and industry,” wrote corporate veteran Gwyn Morgan Monday in his regular column in the Globe and Mail. “The court has, in effect, established a separate legal structure for aboriginals and non-aboriginals that has implications far beyond land entitlements.”

The result, he went on to argue, is an open invitation to “investment-killing litigation” in resource-dependent B.C. — “a windfall for lawyers but economic poison for the country.”

I put the foregoing concerns to the premier’s go-to guy on the LNG file, Minister for Natural Gas Development Rich Coleman.

He disagreed that aboriginal title will be an investment-killer on LNG. As for the concern that B.C. is late coming to the table, the ever-optimistic Coleman noted that none of the dozen or so major proponents has yet walked away from investing in B.C.

“They are spending millions, they tell me we are getting it right, “ he said. “I think we are on the right track, I really do.”

Meaning, as he sees it, that the province will nail down a competitive tax regime in the fall, in expectations that at least one major proponent will make a favourable and final investment decision to proceed with an LNG terminal by the end of the year.

Place your bets. But both assertions are entirely checkable. So British Columbians should know soon enough whether this venture is the real thing, or just more gas.

A model of the proposed LNG Canada liquefied natural gas plant and marine terminal is shown with the Rio Tinto Alcan smelter in the background, at the company's offices in Kitimat. The joint venture is one of several still at the proposal stage.

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